14 ms·
The New Deal
- Goopplesoft 13y ago> Most people don’t do YC for the financial investment—they do it because they want the advice, the help of the network, the benefits of the program, etc. But still, more money for less equity is definitely better. I know advice is a big part of it but this is a exaggeration right? Most of that network/benefits/etc that surrounds YCombinator is about the financial investment.
- sanj 13y agoGetting accepted into YC immediately values your company at $1.7M.
- btrautsc 13y agoinvestors understand YC and don't utilize the investment for valuation purposes that I've seen. most companies I know were going backwards by that math to bring YC on board as an investor (which we did so willingly).
- fuddle 13y agoSeems pretty ridiculous to be honest.
- atmosx 13y agoTo me too. But then again, I'm European.
- michaelochurch 13y agoThat actually makes sense. VC is a reputation-driven system. It shouldn't be that way, but it is. I'm not talking about YC but in general here: there are people way dumber than I am who can put in a good word for a startup and bump its perceived value (and, arguably, its expected return, because reputation is so big in this game) by 50% or more. In fact, I always held a pretty negative view of YC's prior low valuations. It struck me as PG monetizing his (admittedly, well-earned, because his Lisp chops are really strong) reputation, and the low infusions, to me, indicated that the target audience was young people without families. I'm afraid to say this, for fear that people are thinking I'm losing my edge by saying something nice about an investor, but I actually like Sam Altman so far. I think he's making a lot of really good decisions.
- deleted 13y ago[deleted]
- acjohnson55 13y agoI'm not a finance guy, but I've always thought people put too much stake in trying to make realistic dollar values out of what is pretty much unquantifiable, i.e. startup equity. At the end of the day, if you're accepted to YC, you simply need to ponder "is 7% of my company worth the entire package?" and decide accordingly. Of course, these things have real consequences in future rounds, but as far as I know, that's just the agreed upon fiction, rather than some underlying financial truth. To me, this kind of connects to the debate on employee equity that's been ongoing. Sure, intellectually we want to equate that with upfront salary and then compensate at the market rate. But in reality it can never be that way for a plethora of reasons -- tax concerns, option rules, difference in equity classes, etc. Again, I don't really know what I'm talking about, but I don't think people should view equity as dollars. To me, equity is better thought of as an entirely separate finite resource of a company. One which has different value to different people, depending on ability to take on risk.
- cpeterso 13y agoAlternately, if your company is worth less than $1.7M then YC won't invest?
- mcherm 13y agoAs they made clear, YC is not necessarily out just to make a profit. (The investment in non-profits, for instance, is clearly not profit driven.) Sure, they'll make a profit, but that won't be the only driver. Besides, at this stage, no company actually has a value. Companies have a probability distribution of possible values... and it's a very diffuse distribution.
- arbuge 13y agoThis might actually have been a reality for some time. See some of the exit valuations on AngelList - all seem to be $5m+. So $1.7m value at entry isn't out of whack. It does seem though that the primary aim here is to provide more for living expenses, which means that the $1.7m implicit valuation might need to be taken with a grain of salt. Not that it matters much anyway.
- omarhegazy 13y agoPretty insignificant. You can't spend that money. No one can. ; YC, financially, is enough money for you to live in the Bay Area to work on your company for a fixed time in which you're expected to grow and acquire more capital and a probability assessment on your potential future value. Keywords, 'potential' and 'future'. You can't up and sell your company for $1.7M, Sam Altman can't, no one can because no one would buy it because YC isn't saying "You are now in possession of, and operating something, that is worth $1.7M to the world." At such an early stage, all they're really saying is, "There is a probability that your company will be worth $1.7M, and the probability is high enough such that we're willing to put our money where our mouths are."
- TrainedMonkey 13y agoGreat news, on face value this appears to streamline process of getting funded for startups accepted to YC. On the other hand, there does not appear to be anything but face value going on, which is always a plus.
- cperciva 13y agoI can't help thinking that this seems a little bit unfair. While there's a nominal out for "exceptional cases", it seems to me that a company like Stripe deserves a much higher valuation than a company like Tarsnap... not to mention the difference between companies which are joining YC after they're already established and companies which are merely a twinkle in their founders' eyes. What exactly is the problem being solved by having a standard deal which almost everybody gets?
- steveklabnik 13y agoIf they valued different companies differently, then it sends a certain kind of signal. The ones with the better valuation would end up getting a disproportionate amount of follow-on funding. Now, that may be a good thing, but it also might be a bad thing. At a certain point, this is a numbers game, and you want the market to sort things out, not YC management.
- tptacek 13y agoDidn't Altman just say that they sometimes do value companies differently? What was bad about the signaling problem with YCVC was that it probably often had nothing whatsoever to do with the value of the company, and was instead just an artifact of circumstance. But other investors might not be savvy enough (or just might not have the time to think through it) to understand that that was all that was happening.
- steveklabnik 13y agoMaybe? I don't remember, but I may have just missed it.
- morgante 13y ago> Didn't Altman just say that they sometimes do value companies differently? It seems like they're planning to significantly decrease that variation. Almost all companies will give 7%, and a few exceptional cases might give less. This move eliminates all signaling risks (7% is now standard, so it's not a mark against companies, and any deviation is likely upwards).
- austenallred 13y agoI'm more excited about the effect this will have in general than the effect it will have on YC companies. The difference for a YC company is that they don't have to give up an extra percentage as they raise their seed round to cover the convertible note/SAFE that they got from YCVC. With no discount, if a YC company raised at a $10M valuation that 80,000 would be worth .8% of the company - not enough to really move the needle. The difference for the industry as a whole is that most accelerators are trying to mimic YC to a certain extent, and as YC now gives $120K straight-up others might follow suit. It's really easy to say, "We give you 20K for 6-7% because that's YC does." That seems to be almost industry standard, despite the fact that $20K for 3-5 months can be really hard to live on. It will be interesting to see how other accelerators react.
- Edmond 13y agoPOEM alert :affect...think you want effect :)
- austenallred 13y agoThanks :)
- saraid216 13y agoWhat does POEM expand into? Urban Dictionary failed me.
- Edmond 13y agoProfessional Organization of English Majors :)
- suyash 13y agoI'm sure you know that it's not a 1-1 relationship between YC startup and accelerator startup. There are major differences between Incubator like YC and other Accelerators: http://en.wikipedia.org/wiki/Seed_accelerator http://en.wikipedia.org/wiki/Seed_accelerator
- tc_ 13y agosama: While you have our attention, you might as well explain the details about the $120k/7% happening in two chunks. [Edit 1:] Thanks; OK. I had read it as potentially indicating the money came at two different times rather than just from two different sources. All clear now.
- sama 13y agonot much to explain--the reason for this is so that YC itself still has no LPs, and can do new things like fund non-profits without being restricted by an LPA. mechanically, the company gets two separate checks form two separate legal entities--one for 20k and one for 100k--but they work with YC for both of them.
- cperciva 13y agoIs the 7% equity split pro rata between those two entities?
- jscheel 13y agoProps for cleaning things up. Startups have enough difficulties to overcome, without having to spend time and brain cycles navigating a complex funding structure.
- deleted 13y ago[deleted]
- Beliavsky 13y agoI have wondered if affluent parents can replicate at least the money part of Y Combinator. $120K is about the list price of two years of Harvard/MIT/Stanford . With a son who loves to program, I have wondered if sending him to a cheaper school and giving him the difference in installments after he graduates is better than paying for a "name" school. It depends on the quality of the cheaper school, of course. And I think school prestige matters more for investment banking than tech, so I'd be less inclined to suggest a cheaper school to a budding banker.
- tptacek 13y agoThey obviously can, the same way that they can offset the dollars by paying for their childrens' living expenses. But $120k is just not a lot of money. The real value of YC is the signal that getting accepted sends to other seed investors.
- yahelc 13y agoWhich is, incidentally, not dissimilar from the signaling effects of attending Harvard/MIT/Stanford.
- argonaut 13y agoIn the tech world, the YC signal > H/M/S signal.
- maxbrown 13y agoKind of a generalization, no? Do you mean specifically for startup success and/or raising VC money?
- _delirium 13y agoI don't think that's generally true. YC is very well respected in a very specific niche of tech, while H/M/S have much broader name recognition in tech generally. Depends to some extent on what you want to do. YC has great name recognition among VCs, so if you're going that route, it's a good name to have. A Stanford or MIT degree generally has better name recognition among people hiring for tech jobs, especially outside of the SF Bay Area and among people not culturally part of the "startup scene".
- huslage 13y agoWhy do nonprofits get less money?
- sama 13y agowe tried asking some foundations if they would do a similar deal, and disappointingly they wouldn't. we will keep trying, but we wanted to get something in place for this batch. 100k is not that different 120k. i think it's pretty awesome that one of our startups is stepping up and being creative when traditional supporters of non-profits were reluctant to try a new approach.
- morgante 13y agoHave you tried reaching out to other companies (or even VCs) to see if they'd do something similar? Not that $20k is a huge difference, but it seems like the dividends from funding a YC non-profit for nearly any player in the tech scene far exceed $20k.
- sara125 13y agoWhat would be the benefit to foundations of doing a similar deal? Seems that they mostly have passed on YC-funded nonprofits including Immunity Project and Zidisha; and for good reasons. It seems that YC is a little behind when it comes to nonprofits - funding things that were very popular years ago like crowdfunding (Kiva comes to mind). These things are still exciting but they aren't at the edge of nonprofit innovation today. Organizations like Sanergy or GiveDirectly are really disrupting the nonprofit industry. Would love to see YC make a bet like one of those.
- chimeracoder 13y agoI predict that this is going to lead to an increase in the number of applicants who have already raised some money (though not a full round). > Most people don’t do YC for the financial investment—they do it because they want the advice, the help of the network, the benefits of the program, etc. But still, more money for less equity is definitely better. This is good news for people who've issued convertible notes before YC, since the implicit valuation is now $1.7MM instead of ~$300K. This is great for PR purposes (read: bragging rights), but can also have concrete implications: I know at least one company that had a sticky situation[0] when they were accepted into an accelerator after already raising money from an angel investor - the investor ended up owning a huge chunk (the majority?) of the company on paper, because the note converted[1]. They didn't even need the money (it was just a standard part of the accelerator). [0] it was resolved in the end - but it caused extra headache and legal costs [1] A well-written conversion clause in original note can also avoid this problem (e.g. by including a threshold), but hindsight is 20/20 - I know a number of companies that would have been impacted in a similar way.
- pg_is_a_butt 13y agosame as the old deal: PG IS A BUTT
- deleted 13y ago[deleted]
- LukeWalsh 13y agoI think it's also a great deal for first time founders and people who aren't all that familiar with startup funding. $120k for 7% is a lot clearer than $17k + $80k for 7% + converted shares no cap no discount. I also think this is great news for what it will force other accelerators to do. Many people out there claim to copy YC's model with much less friendly terms on the convertible note. This puts everything out in the open if they want to keep up.
- rpgmaker 13y agoIt's way clearer. Is there a book or a resource on the web to learn about startup funding?
- hauget 13y agoForgive my ignorance, but what does LP stand for?
- rmah 13y agoLP = Limited Partners It's how many VC funds are structured. General Partners run the thing, while Limited Partners are investors with limited liability.
- steveklabnik 13y agohttp://en.wikipedia.org/wiki/Limited_partner http://en.wikipedia.org/wiki/Limited_partner
- suyash 13y agoThere is nothing to be forgiven for, it's a very common question. It stands for Limited Partnership - type of Business Entity. In this post, Sam seems to be referring it in context to Limited Partner. Read more about it here: http://en.wikipedia.org/wiki/Limited_partnership http://en.wikipedia.org/wiki/Limited_partnership
- danielweber 13y agoThings I had to look up because I never knew or had forgotten: LP is Limited Partner, basically an investor. A safe is like a convertible note but better. http://ycombinator.com/safe/ http://ycombinator.com/safe/
- suyash 13y agoSeems like YC has come to realize how easy it is out there to get massive seed funding. About time they upped their seed amount.
- ebabchick 13y agoHow can Teespring afford / justify giving every non-profit $50k?
- bitsweet 13y agothey clearly are doing very well
- diziet 13y agoThey are a company with real revenue that's growing and they think the publicity will sort of make up for it, so they don't end up losing too much on it. If yc does 5 nonprofits per batch, $500k is not a lot of money.
- richardjordan 13y agoExactly right. It's great to see a company which is growing fast, generating real revenue and quietly establishing itself as one of the most exciting startups in the valley, giving back like this. Note to founders - this is the kind of thing you can do when your startup makes money!
- mikeg8 13y agoI think your math is off. 5 NP's per batch * 50k = 250k from teespring which makes your point even stronger.
- borski 13y agoThere are 2 batches a year.
- nlh 13y agoThis seems great - simple, better terms, higher valuation. Kudos @sama and YC. Stepping back a bit, it's also a sign of the times -- especially given the tone of the last paragraph, it's clear there's pricing pressure on incubators/accelerators and the competition is heating up a bit. There are more competitors in the space, valuations are rising, and YC is adjusting accordingly. This isn't a good or bad thing per se -- just an observation of a byproduct of capitalism and the realism of the market in 2014.
- thatthatis 13y agoI have trouble deciding which part I like more: the simplicity or the better valuation. Unanimously positive move.
- debacle 13y agoIs this going to change what the YC cycle looks like for the funded companies?
- rdl 13y agoThe old terms weren't bad, but this is unquestionably better: simpler, and higher valuation. Great news for everyone in YC. I don't know if any other accelerators had the same core + YCVC investment model, so I don't know what changes it will have elsewhere except maybe pushing valuations at the accelerator stage a little closer to the demo day amount. (Still higher than $1mm pre, in all but exceptional cases.) (Also, WOW. The teespring guys are doing $50k for each non-profit? That is amazing.)
- Patrick_Devine 13y agoThe 17k for 7% is what always stopped me from considering the Y Combinator route. It's a huge chunk of your company for not very much money. If the new deal had been in place when we started, I think we would have been very tempted to join. The real benefits of YC though are the focus it brings you, and being able to get access to the YC ecosystem. Oh, and being able to attend Demo Day, but with so many companies in the YC program, I think Demo Day isn't what it used to be (I think you get 90 seconds now?). We would have loved to have had access to those resources, but since we had already invested far more into our company in terms of cash, it's hard to justify giving up that much equity for so little. Kudos to Sam for the new program.
- zmitri 13y ago17K for 7% isn't as raw a deal as you think when you realize that at an "acceptance" into YC essentially doubles your valuation to most seed investors.
- Patrick_Devine 13y agoAbsolutely. Being vetted by YC certainly won't hurt your company, but it's still tough though when you've dumped $100k-$200k of your own money plus your time and energy (which is not insignificant when you're an engineer in the Silicon Valley), and you're giving up that amount of equity.
- zmitri 13y agoDepends on what you're trying to achieve I think. I worked on my own stuff for 3 years before doing YC and it was well worth it. My thoughts after going through the program: If you have no product and no track record, it's definitely worth it. If you have something working, but growth isn't amazing, it's a risk because there's a chance you don't get the absolute most out of demo day due to timing -- so one might feel what you describe. That said if you blow up later, I'm sure they will do a fantastic job of getting you to the people you'd want to meet with - eg. Homejoy. But if you come into YC with good growth (like doubling in size every month) it is without a doubt one of the smartest things you can do. You will probably never have as much leverage as you get while going through YC.
- suyash 13y agoSam: Time to update the 'New Deal' on the home page. It still mentions the 'Old Deal'.
- mikikian 13y ago@Sama, is YC still encouraging founders to use SAFEs for their seed round or is that dead?
- jcchee88 13y agoWhat does it mean for a startup to be non-profit? When YC and Teespring each invest 50k into a non-profit, do they expect a return on investment? or is it purely a donation?
- frakkingcylons 13y agoA donation to fund operations.
- wiwillia 13y agoPurely a donation
- billclerico 13y agohey sam - is it 7% of common stock or preferred?
- maxbrown 13y agoMy understanding was that it was always common stock. I believe this is the agreement: http://ycombinator.com/documents/YC_CSPA.docx http://ycombinator.com/documents/YC_CSPA.docx
- wiwillia 13y agoJust wanted to say that we're excited to be a part of the non-profit side of YCombinator. It's been humbling to have Watsi working with us in our office and watching the amazing things they achieve on a daily basis. I have no doubt that amazing non-profits will continue to emerge from YC.
- nsxwolf 13y agoThis will help applicants cover the ever increasing SV rent.
- samstave 13y ago>$120k, which we hope is enough for the founders to run their business and pay their living expenses for at least 6 months, and sometimes longer. So, do you provide personal expense guidance to the founders? How can I get, without joining YC, just this portion of the program ;)
- espitia 13y agoIt would be great to see this annotated on RapGenius in order to learn all the terminology and how investment like these work.
- gomox 13y agoHere you go: http://news.rapgenius.com/Sam-altman-the-new-deal-annotated http://news.rapgenius.com/Sam-altman-the-new-deal-annotated Feel free to comment (it's not very intensive in terms of VC deal terminology, but I wanted to give RG a spin).
- espitia 13y agoWow, thank you so much. You made it really easy to understand.
- chaseadam17 13y agoA lot of companies talk about changing the world, but Teespring really puts their money where their mouth is. Not only have they been quietly supporting us (Watsi) since the beginning, but to commit $50k to every YC non-profit is truly incredible. Teespring is setting the standard for the next generation of startups, and we're proud to call you guys our friends.
- tomasien 13y agoAgreed it's amazing - are they getting anything in return? I'm not asking this in a skeptical way, I just mean do the non-profits run tee-springs or are they just donating money? Either way, bravo!
- chaseadam17 13y agoThey're not asking for anything in return.
- wellboy 13y agoStartups for Startups, they will get back way beyond what they gave away. Great things will come to you if you're not asking for anything in return, because people do remember.
- tomasien 13y agoOh totally! And I hope it was ultra-clear - I wasn't asking because I ASSUME they wanted something in return, but rather because that's a proposition I've never heard before. They're giving them $50k not $50k in tee-spring right? Or is it $50k in tee-spring? I guess that's my question, but either way - too cool! Proud of those guys, right thing to do.
- nedwin 13y agoI now have three Watsi tshirts which I guess is thanks to Teespring. I hope you guys aren't out of pocket there!
- 13y ago
- brandonhsiao 13y agoCan someone explain what the difference is between before and now? Is it that before you could only spend $17k until you raised your next round but now you get it all at once?
- devinmontgomery 13y agoThis says a lot about the alternatives YC says it's really competing with - the other things people who could build great startups would otherwise be doing. $17k is what two engineering students might have made at a summer internship in Boston in 2005. $120k is now what two entry-level engineers might make in six months in the Valley.
- deleted 13y ago[deleted]
- iandanforth 13y agoI really like this model. There are plenty of people who enjoy haggling and the finer points of contracts, but I'm not one of them. If all deals were this simple I think SV startups would save a lot of time, headache and money spent on lawyers.
- iRaj 13y agoThe simple truth is that the new deal is better than the previous one and there is no denying the value add on that YC brings to startups. Also, the fact that many accelerators and incubators would follow the YC lead and increase their initial investments augurs well for the startup ecosystem. Well done YC.
- midas007 13y agoThat's an immediate average valuation boost of around 5x. (1.5 mil vs 300-ish k previously)
- greatsuccess 13y ago7% for 120K???? what kind of goddamned mcdonalds burger flipping founder would accept such a horrible deal?
- crystaln 13y agoWhile going through YC for no money and 7% would probably be worthwhile for many startups, simply for the exposure and advice, I know for a fact the ostensibly terrible terms have deterred many good applicants. I tried for years to apply to YC with a partner who insisted on not taking such terms. While I think he was wrong (and perhaps that signaled some other problems with the partnership,) I'm happy to see the issue go away. A valuation of $1.5-$2M is quite fair for an early stage startup, particularly with the value-add of YC.
- shawn-butler 13y agoHas YC / Teespring taken a position on whether a L3C is a "non-profit"?
- tsenkov 13y agoI don't know how much of this idea comes from Sam Altman, but YC looks better and better since he took over.
- snambi 13y agothis sounds simpler than the previous one.
- ycaspirant 13y agoUpon getting accepted to YC, your company is promised $120K for 7%. Does this imply that if your company is accepted to YC, then it is worth $1.7M (because 7% of $1.7M is $120K)? Or is this not the right way to look at it? Why / why not?
- jlevy 13y agoThere are two chunks (as Sam mentions in his post) -- one chunk is for common stock and the other is in the form of a Safe that converts to Preferred stock.